Water purification and wastewater treatment company UNITED STATES FILTER CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: USF)") else Response.Write("(NYSE: USF)") end if %> continued its wave of acquisitions today by announcing an agreement to take-out bottled water company PURO WATER GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: HHO)") else Response.Write("(AMEX: HHO)") end if %>, which boosted shares of Puro $1 716 to $6 13/16. Puro shareholders are probably only too happy to comply with the take-out price of $7.20 a share in U.S. Filter stock (3.6 million shares at $7.20 comes to $25.9 million in U.S. Filter equity), considering that Puro has achieved zero price appreciation over the last year. Trailing earnings for the combined companies come in at roughly $59.92 million. With U.S. Filter issuing a paltry 617,142 shares for the acquisition, the new share count comes in at 81.27 million. This gives U.S. Filter (with Puro) a hypothetical trailing EPS of $0.73 (excluding goodwill if it is indeed a purchase transaction), as opposed to U.S. Filter's actual trailing EPS of $0.91. This apparent dilution is more a result of the 19 other acquisitions that U.S. Filter has undergone during its most recent quarter.
DALLAS SEMICONDUCTOR <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DS)") else Response.Write("(NYSE: DS)") end if %> gained $6 7/16 to $55 after the specialty semiconductor producer reported Q3 revenues of $93 million and EPS of $0.57, up 9.6% sequentially and $0.04 better than estimates. The company makes Metal Oxide Semiconductor (CMOS) integrated circuits and semiconductor-based systems for a wide range of applications. Gross profit margins expanded solidly for the fifth consecutive quarter and seem to be on a sustainable track above 50% going forward. Dallas Semiconductor was not expected to see these margin improvements until 1998, and the combination of this with three successive quarters of sequential top-and bottom-line improvements has been a boon to the stock. With heavy investments in its Communications, System Extension, and Microcontroller businesses, the gains are set to continue.
QUICK TAKES: Commercial printer GRAPHIC INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GII)") else Response.Write("(NYSE: GII)") end if %> jumped $2 13/16 to $21 5/16 after MAIL-WELL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MWL)") else Response.Write("(NYSE: MWL)") end if %> bid $20 per share in cash to acquire the company...Tobacco firm BROOKE GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BGL)") else Response.Write("(NYSE: BGL)") end if %> rose $5/16 to $6 5/16 after it was announced that it would not have to pay anything in the $350 million settlement of a landmark secondhand smoke lawsuit... Paper producer WILLAMETTE INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WLL)") else Response.Write("(NYSE: WLL)") end if %> gained $2 1/2 to $39 after reporting earnings and saying that it has seen an upturn in paper prices for both "brown and white paper lines of [its] business"... SoundView Financial initiated coverage of automated test equipment company TERADYNE INC. (NUSE: TER) as a "short-term" and "long-term buy," boosting shares $4 to $58 3/4... Diversified products company ARC INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: ATV)") else Response.Write("(AMEX: ATV)") end if %> moved $3/8 higher to $6 3/4 on the strength of a "long-term buy" issued by Ladenberg Thalmann.
Removable hard drive technology company SYQUEST TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SYQT)") else Response.Write("(Nasdaq: SYQT)") end if %> gained $1 13/32 to $5 11/16 after it was upgraded to a "speculative trading buy" from "neutral" by HD Brous & Co.... Shares in BALLARD POWER SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BLDPF)") else Response.Write("(Nasdaq: BLDPF)") end if %> powered $13 7/8 higher to $61 1/4 after positive publicity about the company's fuel cell technology... Telecom software company TCSI CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TCSI)") else Response.Write("(Nasdaq: TCSI)") end if %> gained $1 7/8 to $8 5/8 after BT Alex. Brown initiated coverage of the company with a "buy" rating... MELAMINE CHEMICALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MTWO)") else Response.Write("(Nasdaq: MTWO)") end if %> gained $3 11/16 to $20 3/16 after agreeing to be acquired by privately held food producer and consumer products company Borden Inc. for $20.50 per share in cash... HEALTH SYSTEMS DESIGN CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HSDC)") else Response.Write("(Nasdaq: HSDC)") end if %> moved up $2 1/8 to $12 1/8 on a "strong buy" rating from Gruntal & Co.
Wireless telecom provider STM WIRELESS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: STMI)") else Response.Write("(Nasdaq: STMI)") end if %> gained $3 1/8 to $19 after its Direc-to-Phone International unit won a 10-year contract with Miditel worth over $100 million to provide satellite telephony and data services... VIDEOSERVER INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VSVR)") else Response.Write("(Nasdaq: VSVR)") end if %> added $1 15/16 to $12 7/8 after the networking equipment company reported Q3 net income of $0.04 per share, beating the mean First Call estimate of $0.03 on flat revenue compared with last year's third quarter... Theme park operator PREMIER PARKS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PARK)") else Response.Write("(Nasdaq: PARK)") end if %> rose $3 1/8 to $42 on announcing that it has signed an agreement to become the managing general partner of Six Flags Over Texas and that it will commence a tender offer to buy out the limited partners of Six Flags for total consideration of $315 million.
WASTE MANAGEMENT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMX)") else Response.Write("(NYSE: WMX)") end if %> was trashed for a $3 1/8 loss to $30 5/8 after the company warned that it will earn $0.38 to $0.40 per share in the third quarter, somewhat below analysts' expectations for $0.44. The company said it met neither its revenue growth goals for the quarter nor goals for improved operating margins. Don't mourn for Waste Management, though -- it might want to buy back more of its shares, having completed net share repurchases of $870 million through the first six months of 1997.
Purification equipment manufacturer MILLIPORE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MIL)") else Response.Write("(NYSE: MIL)") end if %> fell $4 to $46 after announcing Q3 EPS of $0.39 before a gain on the sale of equity, down 24% from last year and a penny below estimates. Revenue growth was quite strong at 24%, but most of that is due to the acquisitions of its Tylan mass flow controller unit and its Amicon separation sciences unit. Investors would have probably taken the $0.01 per share miss in stride, given that the strength of the dollar killed some of the company's planned earnings growth, but the guidance that its Tylan acquisition won't be accretive to earnings until next year wasn't pleasing to some investors.
QUICK CUTS: MCMORAN OIL & GAS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MOXY)") else Response.Write("(Nasdaq: MOXY)") end if %> fell $1 1/2 to $4 3/16 after the exploration and production firm issued stock rights equivalent to issuing 28.6 million shares for approximately $100 million, or about $3.50 per share -- 36% below the prior day's closing price... Computer services and Year 2000 remediation company TSR INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TSRI)") else Response.Write("(Nasdaq: TSRI)") end if %> fell $2 5/8 to $24 1/4 on reporting a 23% increase in first quarter EPS on a 59% increase in revenues. The company said contract programming revenues will not grow as quickly this year as last because it does not see the same market opportunities this year... Power conversion semiconducter company INTERNATIONAL RECTIFIER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IRF)") else Response.Write("(NYSE: IRF)") end if %> fell $4 15/16 to $16 7/16 after reporting Q1 EPS of $0.12, double last year's results but a penny below estimates. PaineWebber lowering its rating on the stock to "hold" from "buy."
PC media accelerator card manufacturer DIAMOND MULTIMEDIA SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DIMD)") else Response.Write("(Nasdaq: DIMD)") end if %> slid $1 to $12 1/2 on reporting a Q3 loss of $0.07 per share, a penny below estimates... NEWFIELD EXPLORATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NFX)") else Response.Write("(NYSE: NFX)") end if %> fell $2 1/16 to $30 1/4 on announcing fruitless oil and gas drilling off the coast of China... INFORMATION STORAGE DEVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ISDI)") else Response.Write("(Nasdaq: ISDI)") end if %> lost $1 1/8 to $9 5/8 after the specialty semiconductor company reported a 68% jump in third quarter revenues and a loss of $0.07 per share, missing the one First Call estimate of a loss of $0.04 per share.
FOOL ON THE HILL
An Investment Opinion by Randy Befumo
Electronic Contract Manufacturing Turmoil
Companies that provide electronics contract manufacturing (ECM) may be headed for some turmoil. Today's absolute rout in popular names like ACT MANUFACTURING <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ACTM)") else Response.Write("(Nasdaq: ACTM)") end if %> and JABIL CIRCUITS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: JBIL)") else Response.Write("(Nasdaq: JBIL)") end if %> illustrates the increasing volatility seen in many of these issues. Last week's negative guidance from printed circuit board (PCB) maker and ECM giant HADCO <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HDCO)") else Response.Write("(Nasdaq: HDCO)") end if %> is no longer a one-company problem. With at least two significant investment banking offerings waiting in the wings and the group at all-time highs as measured by almost any valuation, some investors are apparently beginning to lose confidence that the excess returns can continue.
ACT Manufacturing plunged $9 3/16 to $19 13/16 today after the firm pre-announced a disappointing third quarter. Based on current information, the Hudson, Massachusetts-based company will post lower revenues than last quarter and last year's third quarter. ACT management stated that they believe ACT will only book $62 million in revenues for the three-month period, down from $63.9 million last year and $72.4 million last quarter. As a result of the surprisingly low revenues, the company will lose between $0.05 to $0.07 per share, well below estimates of $0.41 per share. ACT's sudden reversal of fortune was blamed on weaker orders from existing customers and one fat $9 million order that could not be shipped before the end of the quarter.
ACT's warning parallels an admonition from Jabil Circuit that was issued last night. St. Petersburg, Florida-based Jabil told investors in a post-earnings conference call to expect 7% growth in revenues and operating earnings next quarter, well below the 20% pace it has set over the past year. Since executing a brilliant turnaround from near-insolvency in 1996, Jabil has become a favorite of momentum investors as the company has consistently trounced earnings estimates. Many high-growth investors who believe Jabil's run might be up are currently cashing in their chips. Other members of the industry like memory module contract manufacturer SMART MODULAR <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SMOD)") else Response.Write("(Nasdaq: SMOD)") end if %>, down $12 5/8 to $72 3/8, were also hit by these warnings.
ECM firms like ACT and Jabil provide outsourced manufacturing capacity to firms with precision manufacturing needs. Although the industry has been around for quite some time, over the last few years the need for these outsourcing services has intensified. Manufacturing has become more complex as "lead-times" for new products have shortened due to heightened competition. Even in something as simple as the central processing unit (CPU), the average consumer can see that while the Pentium lasted almost three years, the Pentium Pro, Pentium MMX, and Pentium II will all probably enjoy much shorter lifecycles. Contract manufacturers inherit the wind generated by Moore's Law -- the thesis that transistor capacity doubles every 18 months.
Rather than expending valuable resources on managing and upgrading manufacturing operations, many electronics manufacturers have simply turned over these responsibilities to their partners, the contract manufacturers. Demand for these services has grown from $20 billion in 1992 to $60 billion in 1996, a 30% annual growth rate. Studies forecast demand swelling to $110 billion by 1999, a 22.1% growth rate. Technology Forecasters looks for even more growth, putting industry revenues in 2001 at $178 billion, a 25% annual growth rate. Many of the big players in the business have actually been able to grow faster through acquisition, often going overseas to expand. As well as taking advantage of cheap labor, these companies are banking on the idea the contract manufacturing will become like container manufacturing or bottling -- worldwide manufacturers will need partners who can produce products for a variety of locations.
The promise of the industry aside, many of these companies' stocks have enjoyed spectacular performances that have far outstripped profit growth. Top performers include PLEXUS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PLXS)") else Response.Write("(Nasdaq: PLXS)") end if %>, up 299% year-to-date; Smart Modular, up 219% year-to-date; Jabil, up 206% year-to-date; and DI GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DIIG)") else Response.Write("(Nasdaq: DIIG)") end if %>, up 180% year-to-date. This performance has drawn the attention of ECM players who want to sell some equity at these prices, including privately held International Manufacturing Services and publicly traded FLEXTRONICS INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FLEXF)") else Response.Write("(Nasdaq: FLEXF)") end if %>. A rush to the equity doors often is a prelude to industry-wide underperformance in the stocks. Although it appears that the industry is poised to do well over the next five years due to accelerating product cycles and the need for higher precision manufacturing, valuation will become much more important as competition among large ECM providers increases. With many having 20% to 40% of their sales with one customer, premium valuations are very hard to justify. Investors are advised to keep an eye out for bargains in the group, but be wary of plunging recklessly into any company just because the shares have fallen a lot.
FORD MOTOR CREDIT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: F)") else Response.Write("(NYSE: F)") end if %>
(703) 736-7363 -- replay on 10/10 @ 2:00 PM ET
ORACLE CORPORATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ORCL)") else Response.Write("(Nasdaq: ORCL)") end if %>
402-220-0103 -- replay through 10/10 @ 5:00 pm EDT
ECHLIN, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ECH)") else Response.Write("(NYSE: ECH)") end if %>
(800) 683-1535 (code: refocus) -- replay through 10/17
ASCEND COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASND)") else Response.Write("(Nasdaq: ASND)") end if %>
(800) 475-6701 (code: 358559) -- replay through 10/17
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